OxfordAQA International A Level Economics
OxfordAQA International A Level Economics 3.1.2 How Markets Work Exam Questions
Free OxfordAQA International A Level Economics revision for 3.1.2 How Markets Work: what you need to know, common mistakes and exam-style questions with answers. Covers demand and supply, price, income and cross elasticities, price elasticity of supply, equilibrium price and how prices allocate resources.
Practise 3.1.2 How Markets Work with past papers
Once you have learnt this topic, find the 3.1.2 How Markets Work questions in real OxfordAQA International A Level Economics past papers and mark them with the mark scheme. Doing lots of real questions is the quickest way to learn how examiners ask about each idea.
About OxfordAQA International A Level Economics 3.1.2 How Markets Work
How markets work is the core of Unit 1 on the OxfordAQA International AS Economics course. You learn the determinants of demand and supply, the difference between movements along and shifts of the curves, and how equilibrium price and quantity are set. Elasticity is central: price, income and cross elasticity of demand and price elasticity of supply, with their calculations and uses. You also study how related markets interact and how the price mechanism allocates resources through its rationing, signalling and incentive functions. Examiners regularly ask for elasticity calculations from data and supply and demand diagrams explaining a price change.
What you need to know
- 3.1.2.1 Demand Demand is the quantity consumers are willing and able to buy at each price. A change in price causes a movement along the curve; changes in income, tastes, prices of related goods or population shift it.
- 3.1.2.2 Elasticities of demand PED = % change in quantity demanded / % change in price. YED = % change in quantity demanded / % change in income (positive for normal goods, negative for inferior goods). XED = % change in quantity demanded of good A / % change in price of good B (positive for substitutes, negative for complements).
- PED and revenue If demand is price elastic, a price cut raises total revenue; if inelastic, a price rise raises total revenue. Determinants include substitutes, proportion of income, necessity and time.
- 3.1.2.3 and 3.1.2.4 Supply Supply shifts with costs of production, technology, indirect taxes, subsidies and the number of firms. PES = % change in quantity supplied / % change in price, affected by spare capacity, stocks and time.
- 3.1.2.5 Equilibrium Equilibrium occurs where demand equals supply. Excess demand pushes price up; excess supply pushes price down.
- 3.1.2.6 and 3.1.2.7 Related markets and allocation Joint demand, composite demand, derived demand and joint supply link markets. The price mechanism rations scarce goods, signals changes in demand and provides incentives for producers to reallocate resources.
Common mistakes in 3.1.2 How Markets Work
- Saying a rise in price shifts the demand curve. A change in the good's own price causes a movement along the curve.
- Dropping the minus sign or misreading PED, for example calling -0.4 elastic. Values between 0 and -1 are price inelastic.
- Writing the elasticity formula upside down. Quantity change always goes on top.
- Confusing a shift in supply with a shift in demand when explaining a price change. Identify which side of the market the event affects first.
- Stating that inferior goods are low quality. An inferior good has negative income elasticity of demand.
Try three 3.1.2 How Markets Work exam-style questions
1. The price of a product rises from $4.00 to $5.00 and quantity demanded falls from 200 to 170 units. Calculate the price elasticity of demand and state whether demand is elastic or inelastic. (3 marks)
Show the mark scheme answer
% change in price = +25%; % change in quantity = -15%; PED = -15 / 25 = -0.6, so demand is price inelastic.
2. Explain why a good with a positive cross elasticity of demand with another good is likely to be a substitute. (2 marks)
Show the mark scheme answer
A rise in the price of the other good leads consumers to switch to this good; so quantity demanded of this good rises when the other price rises, giving a positive XED.
3. Using a supply and demand diagram, explain the likely effect on the market for coffee of a frost that destroys part of the coffee crop. (4 marks)
Show the mark scheme answer
Supply decreases, shifting the supply curve to the left; at the original price there is excess demand; price rises, rationing the coffee; new equilibrium at a higher price and lower quantity (diagram correctly labelled).
3.1.2 How Markets Work FAQs
What does OxfordAQA International A Level Economics 3.1.2 How Markets Work cover?
It covers demand, supply, price, income and cross elasticities of demand, price elasticity of supply, equilibrium, related markets and how prices allocate resources.
Which unit is 3.1.2 How Markets Work examined in?
It is examined in Unit 1 (EC01), The operation of markets, market failure and the role of government, an International AS unit with multiple choice and data response questions. Units 3 and 4 are synoptic, so the ideas can also be used there.
Which formulas do I need for 3.1.2 How Markets Work?
Learn the formulas for PED, YED, XED and PES, and how to calculate percentage change. You also need total revenue = price x quantity to link PED to revenue.
